Neil,
Raw means that all that is stored on the card is the actual digital data that the sensor saw. It must then be processed to create an image, based on the hardware parameters of the sensor. This can be done in the camera in JPG mode, or later on the computer in RAW mode.
One huge advantage that RAW gives you is that white balance is not determined until processing. Therefore, it is trivial to correct that bluish-green shot in the woods to bring back the lost reds. When in JPG mode you would have had to pick a WB setting, like "Daylight" or "Shade" and just hope for the best.
The other advantage is that JPG is a lossy format - there are antialiasing and artifacts on the color boundaries in any JPG image. If you want to correct colors, rotate, adjust the sharpness, etc. you will get a much higher quality result by doing so on the RAW data or on a non-lossy format, like a TIFF, created from the RAW data.
Tom,
I shoot in RAW with a Rebel, though you can't tell from my ADK BBQ pics because I only posted the embedded JPG images so far (Canon embeds a medium-size, medium quality JPG when shooting RAW). The total runs about 6MB a picture - I could get 67 on a 512MB card. I now carry 2 1GB cards and keep the 512MB in the bag, and have never even filled the 2GB's. Although the files are large, you never have to do white balance bracketing, and you can even adjust exposure about 1/2 step in either direction at postprocessing time, limiting how often you need to do exposure bracketing and making for fewer shots overall.
My
Killington pics were all in RAW as well. In particular, note how just doing a white balance correction while postprocessing the RAW data made
this image rich and colorful, instead of a washed-out bluish-grey-green that you'd otherwise get with auto white balance.